Negotiable tansactions typically involve the following parties: a payor, a payee, and a corresponding financial institution such as a bank or other type of intermediary such as a clearing-house. A negotiable document or instrument issued as a form of payment, for instance a cheque, is used by the financial institution to transfer funds between accounts, typically to credit the payee's account and debit the payor's account. Information about all parties involved in the transaction is contained in the negotiable document.
Traditionally, the payor's handwritten signature has been used as an indicia of the authenticity of the document and the information contained therein. The underlying reasons for this include:
(1) a signature is assumed to be difficult to forge, thereby serving as proof that the signor is cognizant of and in agreement with the contents of the document, particularly the amount and identity of the payee; PA1 (2) a signature is assumed to be non-reusable--it is thought of as being an integral or inseparable part of the document and cannot easily be transferred to, or reproduced onto, another document; PA1 (3) once signed, it is assumed that the document cannot be modified or altered; and PA1 (4) it is generally assumed that the signature cannot be repudiated. In reality, these assumptions are generally false. Unless an expert in fraud detection is consulted, the typical financial clerk cannot detect a forged signature. Nor have electronic systems progressed to the point where they can accurately or consistently identify forged signatures. Even if a signature is authentic, it is not very difficult to alter documents after being signed, particularly the monetary value of the document or the identity of the payee. Mioreover, the entire cheque may be fraudulently produced such that no alterations or additions to the negotiable document may be readily discerned. PA1 a) costs to secure cheque storage; PA1 b) costs to print variable data such as the amount of the cheque, the payee, etc., whether printed manually or electronically; PA1 c) costs to decollate continuous cheque forms typically used in cheque printing; and PA1 d) cost to manually or mechanically apply the requisite signature, assuming such signature is not pre-reproduced on the cheque stock.
Cheque fraud has been considered to be the third largest type of banking fraud, estimated to be about fifty million dollars per year in Canada according to a 1993 KPMG Fraud Surves, Report. In the United States, such fraud is estimated to cause financial loss of over ten billion dollars per year, according to Abagnale & Associates. Financial institutions and corporations spend a great deal of time, effort and money in preventing or recovering from fraudulent cheques. With the recent proliferation and affordability of computer hardware such as document scanners, magnetic-ink laser printers, etc., cheque fraud is expected to reach new limits.
To date, various attempts have been made to protect cheques from fraudulent interference of the type described above. One method is to use mechanical amount-encoding machines which create perforations in the document reflecting the monetary value thereof. The perforations in the document define the profile of an associated character or digit. However, a cheque forger can still scan the payor's signature and reprint the cheque with a new amount using the same type of readily available mechanical encoding machine to apply the perforations. This method also has a significant drawback due to the amount of time and human labour required to produce cheques, and thus may be considered expensive or impractical for certain organizations.
Indeed, even without the use of mechanical amount-encoding machines, a December 1992 study by the Hacket Group, cited in Canadian Business, Vol. 65, page 19, of 55 leading American Corporations found that the typical corporation spends over US$6 for preparing or processing every cheque. The breakdown of this expense includes:
Another prior art cheque protection method uses electronic means to print the numerical amount of the cheque using special fonts, supposedly difficult to reproduce. A negotiable document is considered unforged if it contains the special font and if the characters representing the monetary value of the cheque are not tampered with. Due to the fact that these characters are difficult to produce without a machine or a computer, the cheque is assumed to be protected. Given the ready availability if high quality scanners and printers, it is, however, possible that the cheque forger will copy one of the characters printed on the cheque and paste it as the most significant digit of the amount thereby increasing the monetary amount of the transaction. As such, after the forger reprints the cheque with a new most significant digit, the cheque will meet the criteria of having the special fonts defining the numerical amount, whereby the forged document may be interpreted as a valid cheque.
Other types of cheque validation techniques are disclosed in U.S. Pat. No. 4,637,634 to Troy et al. This reference disclose a sales promotional cheque which consists of a. top cheque half, distributed through direct mail, flyers, newspaper inserts, etc., and a bottom cheque half which may be obtained, for example, when a stipulated purchase of goods or services has been made by the intended payee. If information on the top and bottom halves match, the cheque becomes a negotiable instrument. For validation purposes, the bottom half is provided with at least one code number that is generated, using a complex mathematical formula, from the cheque number, the register number, and the script dollar amount, all of which are present on the face of the cheque in huiman-readable form. The validation code number appears as a bar code or other machine readable code on the face of the cheque. For verification purposes, the same code number appears underneath an opaque "rub-off" overlay which, if tampered with, renders the cheque void. To verify the cheque, the opaque overlay is removed to reveal the concealed code number which is then compared against the machine readable code number printed on the cheque. This system is still prone to tampering because one could alter the amount of the cheque without tampering with the ecode numbers. To avoid this situation, the cheque must be compared against a predefined list, i.e. an electronic file, listing all of the payor's cheques to verify the original amount. Thus, this system may therefore be impractical for most organizations and is incompatible with current cheque clearing procedures.
There remains a need for securing information associated with negotiable documents form being fraudulently tampered with. Moreover, there remains a need for such a security system which is compatible with current cheque printing systems and cheque clearing systems, and which generates cheques that are essentially non-repudiable.